Photo Credit: Associated Press
The investment climate in South Africa, long the victim of state capture and policy uncertainty under Jacob Zuma, has been in an upswing since November, when market favorite Cyril Ramaphosa was elected to lead the ANC. While Ramaphosa was given the top spot, many of Zuma’s allies remained in key leadership positions, and it was unclear how much control Ramaphosa would have to enact sweeping policy changes. Then, in early February, President Zuma’s State of the Nation Address (SONA) was postponed - an unprecedented delay after the ANC decided that he should not be given the national platform. In the week that followed, the ANC demanded that Zuma quit the presidency. When he refused, the party threatened to support a non-confidence vote in parliament brought by the opposition. Facing certain ouster, Zuma finally resigned and Ramaphosa was instated as President. In the past week, he has delivered his own SONA, a revealing Budget Speech, and late Tuesday night, made the surprise announcement of a new cabinet.
Ramaphosa Means Business
If it was not already clear from his background (once Nelson Mandela’s preferred successor, Ramaphosa exited politics in the early ‘90s and went on to make a name for himself in the private sector) - Ramaphosa’s moves over the past week clearly indicate one thing: he means business. His first Budget Speech as President, delivered last week, was well received by the business community and observers, who applauded it for straddling the line between being business friendly, while still making tough decisions (like raising the VAT rate to cut the deficit). The improved debt-to-GDP ratio may even be sufficient to dissuade Moody’s from downgrading South Africa in March, as had been predicted to happen had Zuma remained in power. Low inflation rates, along with a stronger rand, will likely encourage the South African Reserve Bank (SARB) to further cut interest rates in 2018.
Building upon the confidence of the Budget Speech, Ramaphosa announced earlier this week that he would reshuffle his cabinet. Although billed as a temporary arrangement designed to maintain unity within the ANC, some commentators have criticised the President for retaining some of Zuma’s supporters. However, the new Cabinet configuration is overall a significantly positive step towards shutting down the State Capture of the Zuma Era, and issuing in a new dawn for business and investors. Of note are changes to the leadership in Treasury and Public Enterprises. Pravan Gordon has been made Minister for Public Enterprises, and Former Finance Minister Nhlanhla Nene has been reinstated – both men were previously sacked under Zuma for standing in the way of his agenda and speaking out against corruption.
What Does All This Mean For Investors?
Many industries have been on tenterhooks under Zuma, with policy uncertainty resulting in investment stagnation at best. Ramaphosa is now tasked with turning around the Continent’s biggest economy, and will look to do this by focusing on creating a better environment for businesses and investors. We see three sectors that Ramaphosa will likely focus his attention on and seek to stimulate:
- Early signs are positive: President Ramaphosa stepped in earlier this month to postpone the review of the controversial Mining Charter, in order to make way for a discussion on the best way forward.
- Ramaphosa expressed in his SONA that he wished to intensify engagements with all stakeholders, ensuring that the new Charter represents a social compact between industry, government, labour and representatives of the mining communities
- The agreement has the potential to provide much needed policy certainty to attract investment and create jobs. There is increasing optimism among operators that they can begin to move away from existing site maintenance and reinvigorate greenfield investments.
- Tuesday’s appointment of Gwede Mantashe as the new Mineral Resources Minister also bodes well. Mantashe is very well-regarded by both the public and within the ANC, and is a close ally of Ramaphosa’s. His appointment to the position speaks to Ramaphosa’s commitment to reform in the sector.
- No changes were made to the Minister for Agriculture. Rampahosa is not a populist, but the one major issue in which he will try to court wider populist support is in land reform, via expropriation of land as restitution.
- However, this will not be done without consultation from the private sector, in order to partner with farmers to keep land productive.
- In a November 2017 Op Ed penned by Ramaphosa in South Africa’s Business Day, he laid out how he planned to “fix the South African economy.” Key to his plan was invigoration of the agricultural sector.
- The National Development Plan (devised in 2013, in a vision for 2030), of which Ramaphosa was a key architect, envisions 1 million jobs in the industry. To do this, the NDP emphasized the need for greater investment in irrigation and support for small-scale farmers, to assist them in gaining profitable access to markets for their products.
- Ramaphosa’s recent statements on land expropriation thus need to be understood in the context of the NDP, and with the understanding that any reforms will be undertaken by bringing in the private sector.
- Energy – with a focus on Renewables
- Reinvigorating the energy sector will be critical as the country’s state-owned enterprise is bankrupt due to years of rent-seeking and corruption under Zuma.
- As in other industrial nations, despite coal’s historical importance in South Africa’s economy, the tide is shifting: the country has undertaken commitments to reduce greenhouse gas emissions under the Paris Accord, as well as implementing local policy shifts to reduce dependence on coal.
- The Integrated Resource Plan went through a public participation process during 2017, with the intention to reduce the contribution of coal to the South African energy matrix to less than 40% over the next 20 to 30 years. Despite widespread consensus reached in this area, Zuma blocked its implementation due to a corrupt deal to build nuclear plants with Russia - this has in turn stifled creation of any other form of energy, and Rampahosa is now extremely motivated to open investment to renewables.
- Jeff Radebe was appointed the Energy Minister in Tuesday’s reshuffle. Radebe is the longest serving cabinet member, remarkable only for his ability to not cause a stir. It is unclear whether he will be able to galvanize support for the changes needed in the sector. What is hopeful, however, is that while Minister of Public Enterprises, Radebe spearheaded a project to break up the monolithic SOEs and allow new entrants into key markets. Although this plan was never implemented, it does signal his openness to dismantling Eskom and allowing renewable companies to enter the market.
- Chris Dobson, President